How to calculate the ROI of customer experience

In any business, gaining a competitive advantage is instrumental in driving revenue and achieving overall success. 

Positive customer experiences (CX) are a significant catalyst for establishing this advantage, allowing your business to differentiate itself from competitors. 

However, the challenge lies in effectively measuring and validating customer experience, which companies often consider a "soft metric."

When you present numerical data to executive teams, this triggers action and decision-making. On the other hand, stakeholders tend to overlook ideas that lack supporting numbers, as these can be risky and affect their bottom line. 

Plus, if you can’t easily measure performance, it’s challenging to evaluate and replicate consistently. 

Calculating CX's return on investment (ROI) allows your organization to obtain quantifiable and actionable proof. This can aid the executive team’s decision-making about particular CX improvement initiatives. Let’s learn more about the ROI of customer experience. 

The return on investment of customer experience establishes a direct link between positive customer experiences and improved financial performance. 

According to a Forbes article, companies that prioritize their customers are 60% more profitable. 

Additionally, businesses that create exceptional customer experiences generate nearly six times more revenue than those that neglect this aspect. 

These compelling numbers highlight the significance of customer-centric strategies. Plus, they’re great for showing company executives the importance of CX. 

But what exactly does customer experience ROI entail? 

It involves a focus on customer-centric metrics and their correlation with financial performance. It encompasses the calculation of customer value and the importance of customer retention. 

Moreover, it includes measuring costs associated with customer acquisition and relationship maintenance. 

Customer experience ROI is an unambiguous, multifaceted concept. It’s a concrete measurement of the value derived from the customer experience.

Estimating the ROI of CX entails choosing key performance indicators (KPIs). 

For our example, let’s use churn rate. This particular indicator represents the rate at which customers discontinue their relationship with the company. 

The company needs to analyze why the churn rate is at a particular level and determine the potential value of reducing that rate. 

If the executive team needs to approve a budget for a customer retention program, executives need to see that the program affects ROI for churn rate. 

Typically, retaining existing customers is more cost-effective than acquiring new ones. 

Additionally, the company must calculate the cost of investing in customer experience improvements and subtract it from the added value. 

This calculation yields the return on investment (ROI) of customer experience. 

Using different KPIs is also possible depending on the company’s targets and goals, and these KPIs will yield different ROI measurements. 

The steps involved in estimating the ROI of CX are as follows:

Define key performance indicators (KPIs)

Identify the key metrics influenced by customer experience. These can include: 

• Customer retention rates

• Customer lifetime value (CLV)

• Average order value

• Average revenue per customer (ARPC)

Gather baseline data

Collect historical data on the relevant KPIs before CX improvements.

Set targets and goals

Determine realistic targets for each KPI based on industry benchmarks or internal goals.

Calculate costs

Identify the costs associated with implementing your CX improvement plan.

Measure post-implementation data

After implementing the CX improvements, track and measure the same KPIs. 

Calculate ROI 

ROI = ((post-implementation value - pre-implementation value) / total investment) * 100.

Present findings

Prepare a report to highlight the estimated ROI of your CX improvement initiative.

Companies can gain valuable insights into the financial impact of improved customer experiences by following these steps. This enables them to make informed decisions regarding investment into customer-centric actions. 

Calculating CX ROI involves various metrics, including:

• Churn rate

• Customer lifetime value

• Cost of support

• Average transaction size

• Average contract value

Churn rate

The churn rate is a valuable metric for assessing customer experience ROI. It quantifies the rate customers terminate their business relationships with a company. 

You calculate churn rate by dividing the number of lost customers by the number of customers acquired and multiplying the result by 100 to obtain a percentage.

High churn rates indicate challenges for a company, as customer retention is crucial for sustaining revenue streams.

Slowing down the churn rate holds significant advantages for the company's bottom line, ensuring a more stable and profitable business outlook.

Customer lifetime value (CLV)

Customer lifetime value (CLV) represents the total worth a customer brings to a business throughout their entire relationship. It goes beyond the sum of actual monetary transactions and includes the potential value from future transactions. 

Calculating CLV involves analyzing a customer's past purchase history and predicting their future buying patterns.

For example, if a customer buys an average of three new dresses per year over ten years, a company can reasonably project similar sales. 

Considering the average duration of a customer relationship, the company can estimate how long it can expect to continue generating revenue from that customer. 

Customer lifetime value greatly interests key stakeholders because it directly impacts revenue generation.

Cost of support

To calculate the cost of supporting a customer, subtract the cost of support from their value to determine ROI. 

You can calculate the cost of support by determining the cost per order or the cost per dollar of revenue. 

To calculate the cost of support per order, divide total customer support expenses by the number of orders during a specific period. 

To calculate the cost of support per dollar of revenue, divide total net sales by the number of orders. 

Adjusting customer support resources or investing in automation can change support costs. 

Average transaction size

The average transaction size is instrumental in calculating customer experience's ROI because it helps predict CLV more accurately. 

To calculate an average transaction size, divide total sales by the total number of transactions in a certain timeframe. 

Average contract value

If the transaction is contractual, you calculate the average contract value by dividing the contract value by the number of years in the contract. 

This aids in determining CLV. 

Improving ROI on CX is a logical progression once stakeholders realize the value of customer-centric actions. 

However, improving ROI involves a deep dive into actual customer feedback. This ensures you design a customer-centric culture based on reality rather than misconceived assumptions. 

Some methods for improving customer experience ROI include: 

• Continuously measure and evaluate the metric

• Map the customer journey and eliminate bottlenecks

• Increase customer retention through various programs

• Cross-sell and upsell

Continuously measure and evaluate customer experience ROI

Calculating the ROI of customer experience is an ongoing process rather than a one-time event. While it may not require daily analysis, you should periodically review it to drive continuous improvement and achieve desired outcomes.

Measuring customer service can be as intricate as necessary to bring about positive change. While soft metrics, such as customer satisfaction, may not hold the same numerical value, they offer valuable insights into the "how" and "why" of customer experiences.

Establishing a customer experience culture involves shifting the company's mindset from a revenue-focused approach to a customer-centric approach. Ultimately, this leads to increased revenue generation.

Map and improve the customer journey

Understanding the customer journey is the initial step toward enhancing it. 

Closely observing how customers navigate a website or progress through the sales funnel delivers insights into where you can optimize and simplify the journey.

Mapping and improving the customer journey benefits the customer and the business. Customers are delighted with their experience and the effortless nature of their transactions, while the company saves time and resources on customer support. It's a win-win situation.

Increase customer retention

Boosting customer retention is crucial for sustaining revenue streams, but it requires a deliberate effort. Your company must learn the reasons behind customer churn and devise strategies to minimize it. 

You can use several effective methods to increase customer retention, such as: 

• Analyzing reviews and feedback

• Implementing smooth onboarding

• Focusing on high-value customers

• Enhancing service quality

• Offering incentives for repeat business

Adopting these approaches helps businesses foster stronger customer loyalty and minimize customer churn rates.

Cross-sell and upsell

Finally, cross-selling and upselling align with the company's financial goals while enhancing the customer experience. 

Customers expect consistent quality when they engage in subsequent transactions with a business. They already possess familiarity with the company's systems, making the transaction smoother and more convenient.

Additionally, the sales team has prior knowledge of established customers, enabling them to provide personalized recommendations based on previous preferences. 

This fosters the development of long-term relationships, cultivating customer loyalty and minimizing the likelihood of customers seeking alternatives.

Business executives and key stakeholders seek concrete numbers to make well-informed financial decisions. However, they shouldn’t overlook the undeniable positive ROI of CX. 

It brings significant customer benefits and aligns with the organization's financial objectives. Investing in improved customer experiences attracts new customers while fostering the retention of existing ones. Customer value increases when they’re satisfied with the service they receive. 

A strong customer experience is crucial in enhancing the financial position of all traditional businesses that strive to maximize profits.

A crucial part of understanding the customer experience involves taking a customer-centered approach and understanding their journey. Once the organization can empathize with the customer, it can improve the experience and maintain the relationship.